Americas: Structural shifts shine a light on select geographies
Focusing on favourable developments in Brazil
In most cases, farmland investments are affected by factors such as rainfall amount and soil type. Brazilian farmland, however, has recently been affected by different factors: local political developments and global trade issues. While climate risks will continue to affect farmers, we believe current developments can potentially create opportunities — if investors know where to look.
We expect an acceleration in an already solid Brazilian farmland sector
Although Brazil’s economy has experienced slow growth in recent years, recent developments provide a spark of hope. The country has been enacting a series of economic and regulatory reforms that we believe will help boost overall economic growth that should provide meaningful benefits to the agricultural sector.
Brazil’s agricultural industry has long been a bright spot for that country’s economy. Brazil has been able to produce enormous volume and diversity of crops and has shown an impressive ability to increase productivity. Soybean production in Brazil, for example, has grown from 20 million tons to 120 million tons in the last 30 years. This sort of strength has helped Brazil sustain employment levels and the country’s trade balance. Our local farmland investment team in the region believes Brazilian farmland is well positioned for future growth and expects political reforms to help accelerate growth in Brazil’s agricultural production.
The growing U.S./China trade disputes have rattled global financial markets, but we think this sort of disruption can also create opportunities.
Brazil may be one of the few beneficiaries of the escalating global trade war
The growing U.S./China trade disputes have rattled global financial markets, but we think this sort of disruption can also create opportunities. Consider: As a result of higher tariffs and growing uncertainty, soybean prices fell in the U.S. in the second half of 2018, but actually climbed in South America and in Australia.
Trade disputes have meant that China has been reluctant or unable to import from the United States. This has provided a boon to Brazilian farmers. As shown in Figure 3, soybean prices have been falling in the U.S. while appreciating in Brazil, a trend that is benefiting Brazilian farmers and farmland investments in the country.
Americas real estate
Demographics, urbanization and technology: Key U.S. cities and sectors appear poised for growth
Cities with youthful populations tend to be more influential, enjoy greater productivity and stronger-than-average economic growth. According to the United Nations, more than half of the world’s population live in urban areas, and it is expected to rise to 68% by 2050. Additionally, we think cities that are able to benefit from technological disruptions like e-commerce are particularly attractive. Our research suggests several U.S. cities, such as Los Angeles, fit this description; Los Angeles is well positioned for long-term growth, and real estate investors should watch L.A. as younger populations from around the world flock to the city.
Los Angeles benefits from both well-known and “hidden” real estate opportunities
The Port of Los Angeles recently experienced lower levels of imported goods in the last year due to the U.S./ China trade tariffs as shown in Figure 4. However, the U.S./China tariffs have not affected warehouses located on the West Coast yet, as many U.S. importers have substituted goods from China with goods from Southeast Asia and other parts of the world. Unless the tariffs remain in place for years, and U.S. importers and businesses begin shifting their supply chains away from Asia, we believe the impact on West Coast warehouses will remain minimal.
Industrial demand over the last several years has been driven much more by secular shifts in supply chains (e-commerce) than by overall growth in consumption and trade. The long-term growth trend of e-commerce could insulate warehouse demand from some of the risks associated with tariffs. There is a growing need for freight storage in Los Angeles, which in our opinion makes warehouse capabilities a particularly attractive investment idea.
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Sharpe Ratio (Risk-Adjusted Return) is a risk-adjusted return measure calculated using standard deviation and excess return to determine reward
per unit of risk. The higher the Sharpe Ratio, the better the historical risk-adjusted performance. The “Shiller” P/E Ratio is a valuation measure that
uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business
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listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market List. The NCREIF Farmland Property Index is
a quarterly time series composite return measure of investment performance of a large pool of individual farmland properties acquired in the private
market for investment purposes only. The NCREIF Property Index (NPI) is a quarterly, un-leveraged composite total return for private commercial
real estate properties held for investment purposes only. The NCREIF Timberland Index is a quarterly time series composite return measure of
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A word on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk,
derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Foreign investments involve additional risks,
including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Alternative investments
may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing
or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory
requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative
investments are not suitable for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of
the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future
results, and there can be no assurance that comparable returns will be achieved by any strategy. As an asset class, real assets are less developed,
more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership
of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and
ability to obtain insurance, and risks related to leasing of properties. Real estate investments are subject to various risks, including fluctuations in
property values, higher expenses or lower income than expected, currency movement risks and potential environmental problems and liabilities.
Farmland investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to
risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency
values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
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